This banking reform package is intended to implement reforms agreed  internationally following the 2007-2008 financial crisis to strengthen the banking sector and address outstanding challenges to financial stability.

At present, the Capital Requirements Directive (CRD IV) together with the Capital Requirements Regulation (CRR) implement the main Basel III reforms in the EU. They apply to credit institutions and investment firms and set out the key prudential requirements amongst other things. The European Commission has proposed an update to both through CRD V and CRR II. These form part of a larger package of banking reforms including proposals to amend the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRM).

What has been proposed?

There are two key parts to the proposed amendments. Firstly to implement changes to international prudential standards by the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS) and, secondly to implement EU specific reforms which came out of the Commission’s review on the impact of CRD IV on banks’ financing in the EU.

In relation to the CRR, the Commission proposes extensive amendments including:

  • Leverage ratio – binding 3% ratio of non risk weighted assets to Tier 1 capital;
  • Net stable funding ratio – binding 100% ratio of available stable funding (ASF) to the required amount of stable funding (ASF);
  • Total loss absorbing capacity standard – introduction of harmonised minimum requirement for own funds and eligible liabilities (MREL) for systemically important institutions;
  • Market risk – new risk sensitive rules to implement the 2016 BCBS standard also known as the fundamental review of the trading book (FRTB);
  • Counterparty credit risk – introduction of the BCBS standardised approach (SA-CCR);
  • Exposures to central counterparties (CCPs) – preferential capital treatment for exposures to qualifying central counterparties; and
  • Introducing measures to improve lending to small and medium sized businesses and to infrastructure.

In relation to CRD IV, the Commission has made proposals with regards to exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures.

What’s happening next? CRD

EU ambassadors have agreed on the whole package of measures. Following a legal linguistic review of the draft texts, the European Parliament and Council will then be requested to adopt the legislation. You can read the latest Council of EU press release here.  The earliest that the measures are expected to come into force is 2021. In the meantime, BCBS have just agreed an update to their 2016 standard on market risk, which is expected to be in force by 2022. The saga continues…

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